Stockwatch: Record high increasingly likely

Have the Mid-250 shares in price comparison website Moneysupermarket.com entered another uptrend?

Soaring from 220p to 380p in 2015 earned them an annual average price/earnings (PE) multiple of 32.2, but this unwound back to 234p over 2016 amid plenty of volatility. The market has wrestled many a dilemma, more notably that price comparison websites are an established growth story and are becoming more competitive, especially as insurance companies develop their own platforms.

There has been criticism the websites aren't sufficiently independent, with claims they overlook the best-value energy deals if no switching commission will be earned.

But much of the British public is still stuck on either standard energy tariffs or meekly accepts annual insurance renewal quotes, failing to examine prices elsewhere. Rising inflation could well prompt more switching.

In such a context, Moneysupermarket is very well placed. A survey by techradar.com explains: "Of all the sites on test, Moneysupermarket has the widest range of immediately accessible offers. We found Moneysupermarket's interface to be among the best we've ever tried; very well designed and clear, with appropriate hints and advice."

Jumping revenue growth

The table shows very strong progression of turnover and profit. Although consensus expects earnings growth to slow drastically from 32.1% to 7.4% in 2017, the group managed to achieve 20% of growth in the final quarter of 2016, year-on-year. Momentum had accelerated from the 12% generated across June-September.

The stock initially jumped 10% to 335p, before settling at about 320p on a forward PE in the high teens. While that looks pricey against recent earnings growth projections, forecasts have risen lately.

This kind of spending may reflect a behavioural shift towards wanting value for moneyIn particular, insurance grew 30% to £37.4 million on the Moneysupermarket.com website, the largest revenue element within the group, while money was near-flat at £17.6 million and home services jumped 17% to £11.9 million. Moneysavingexpert.com rose 9% to £8.3 million and Travelsupermarket.com advanced 21% to £4.4 million.

This kind of spending is significantly different to retailers' enjoying a buoyant Christmas as consumers resorted to credit; it may well reflect a behavioural shift towards wanting value for money, which is likely to increase if Brexit and rising inflation usher in another sense of austerity.

Patient investors may prefer to wait and see what broker upgrades follow; whether the stock comes back a bit more after this surprise positive news; although its essential story of improving progress and prospects is clear.

Valuations encourage selling

A chief reason for stock weakness in 2016 has been perception of a growth rating undermined. Dividing the PE multiple by the rate of annual earnings growth gave attractive PEG ratings up to 2016, but this suddenly spiked to a horrible 2.6 for 2017 - ideally you are looking for sub 1.0.

Realistically, investors can look for earnings growth in the percentage teensI've previously mentioned that PEGs can be a fleeting snapshot, yet they're visceral for many growth investors and perception hinges on change. Although annual growth rates of about 30-46.5% over the last three years look unrepeatable, the 2017 consensus may under-estimate demand for price comparison website services.

Realistically, investors can look for earnings growth in the percentage teens, with some premium for scarcity in the stock's rating as sound growth companies become harder to find at fair price.

Dividend attracts big investors

While a prospective yield of just over 3% covered 1.5 times by forecast earnings may not look exciting to those seeking income, I recall one fund manager citing Moneysupermarket's attraction as a yield stock on the grounds of its solid dividend growth.

The 2016 volatility shows how vital awareness of the overall risk/reward profile is amid high expectations for earnings. Yet with UK gilts still very expensive in long-term context, equity yields will continue to grow in appeal - assuming the Bank of England doesn't suddenly jack up interest rates.

The FTSE 350's trailing PE multiple more-than-doubles from 10.7 in 2011 to 25.1 in 2016, while earnings cover for dividends fell from 2.4 times to 0.7 - uncovered, in other words. Admittedly this represents a very wide range of cover.

Moneysupermarket may enjoy more appeal for income than riskier cyclicals with fat yieldsThe ultra-low interest rate environment has helped support payouts that may not be sustainable over the long-term, as firms have increased long-term debt to pay for acquisitions and investment.

Moneysupermarket's end-June 2016 balance sheet had just £10 million of long-term debt versus £20.7 million of cash; and the cash flow statement showed £43.1 million of net cash from operations versus £36.1 million spent on dividends.

The five-year record shows very strong cash flow versus modest capital spending demands. I suggest Moneysupermarket may enjoy increased appeal for income relative to, say, riskier cyclicals with fat yields, or housebuilders where the latest figures imply UK house prices peaked in December.

Protection from the storm

Obviously I rather like Moneysupermarket; I've numerously drawn attention to it since it was priced 145p in October 2013 and yielded 5% for both its capital growth and income properties.

But the websites' prime positioning at a time of rising demand for its essential services is ideal. The latest update affirms potential for a robust 2017; the company's low debt, strong cash flow and dividend record being suited to medium-term economic prospects.

Also of interest is a new chief executive taking the helm on 10 April: Mark Lewis, previously retail director at John Lewis department stores, who initially ran that group's online operations. Much obviously depends on how he settles in and becomes perceived, but this helps refresh the Moneysupermarket story, which has needed something new.

Re-attaining the early 2016 high of 377p and beyond, therefore, looks increasingly likely.

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This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.